Follow up

HMRC guidance - SACM120

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Is it too late to claim allowances for older years?

Tactic or error

The annual investment allowance (AIA) for capital allowances (CAs) is currently £200,000 per tax year. Expenditure by a business up to this amount can attract a deduction of 100%, with any excess being allocated to the appropriate pool, attracting writing down allowances at 8% or 18% on a reducing balance basis. Most small businesses will simply claim the AIA. However, there are some instances where this may not be efficient.

Example. You look into your new client’s previous correspondence and discover that the items in question were plant and machinery bought for £32,000 in 2015/16 as part of a planned expansion. This is well within the AIA available, and would have given rise to a loss of £27,000. However, your client informed his accountant that his expected profits for the subsequent years would be £9,000 and £12,000 respectively. Accordingly, the accountant advised your client that claiming the AIA in 2015/16 would lead to the losses being wasted as the personal allowance would largely cover profits of that size anyway.

Retrospect

Your new client’s profits for 2016/17 were slightly better than expected at £17,000, but he secured two large contracts in 2017/18 which means his profits were closer to £60,000 once the accounts were prepared. The previous accountant did not have a good working knowledge of the CAs legislation and assumed that the amount of £32,000 could be claimed as AIA on the 2017/18 return. He filed it in August 2018, but HMRC have rejected the claim.

Pro advice. HMRC is correct in its treatment as the AIA can only be claimed for the year the expenditure occurred. It would have been better to amend the 2015/16 return in the amendment window (usually to 31 January 2018) to include a claim for AIA which would then have given rise to a carried forward loss.

Your client has asked you to file a claim for overpayment relief, as he believes this can open up four tax years. However, he is mistaken as overpayment relief can’t extend the deadline for claiming relief, per HMRC guidance at SACM12075 (see Follow up ).

Solution

What you can do is bring the expenditure into the relevant pool for any open tax year, provided your client still owns the asset. This could therefore be done for 2016/17 or 2017/18 (or indeed a later year). The expenditure will then attract writing down allowances at 18%, i.e. £5,760 in the first year, then on a reducing balance going forward.

Pro advice. Our advice would be to pool the expenditure in 2017/18 not 2016/17. The client is into higher tax rate for that year, and so the reduction in taxable profits will be more valuable.

In this scenario, your client will eventually secure more relief than if the AIA had been claimed in 2015/16, although they will have suffered the higher tax burden, and hence a worse cash-flow position initially, which may explain why he wasn’t happy with his previous advisor.

Pro advice. You should be aware that if an enquiry into a return is open, or a discovery assessment is made, a claim for AIA can still be prepared.

HMRC guidance - SACM12075